Major investment firms — including Goldman Sachs, BlackRock, and Morgan Stanley — have announced plans to lay off employees as their revenues drop amid rising macroeconomic uncertainty. But the job cuts haven’t reached the private markets — at least not yet.
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Private Market Managers Are Still Hiring — For Now
More than 60 percent of private capital firms added staff in 2022, but there are early signs that the hiring efforts could pause this year.
Nearly 80 percent of private capital firms expected to increase headcount between 2022 and 2023, according to the latest private capital employment report from Preqin. Sixty-one percent of surveyed firms reported that they had added staff over the prior year, up from 51 percent during the period from 2020 to 2021.
Only 10 percent of firms made job cuts last year, according to the report.
Preqin based the results on a survey of 77 private capital firms, including those focused growth capital, leveraged buyouts, real estate, and venture capital. About 70 percent of the participants had offices in North America, with Europe and the Asia-Pacific region ranking as the next most common locations, at 27 percent and 20 percent, respectively.
The survey found that hiring efforts in the private capital sector have mostly been focused on building out investment teams. According to Preqin, 71 percent of the participating firms said their greatest hiring need was to expand their dealmaking departments. By comparison, 9 percent pointed to corporate operations, such as accounting, human resources, and information technology. Another 9 percent said the most urgent recruiting goal was finding appropriate operating partners.
With increased headcount, however, comes additional compensation costs. According to Preqin, compensation expenses grew as a proportion of total revenue in 2022, increasing from 60 percent from 56 percent in 2021.
For managing partners on deals teams, the average cash compensation was about $772,000 last year, which included base salary and annual incentive awards. After accounting for long-term incentives and carried interest, they made an average of $2.3 million in 2022. The total package for CEOs, including long-term incentives, was about $4.2 million on average and nearly $1.7 million on a median basis. Chief operating officers and chief financial officers earned an average total of $614,000 and $1.1 million, respectively.
The Preqin report attributed the increased hiring efforts to a talent war that intensified during the Covid-19 pandemic, as more employees demanded hybrid work models and better work-life balance. But according to Jarret Sues, managing director at Ferguson Partners’ compensation consulting group, employers may soon gain the upper hand as the labor market loosens up.
“The pendulum is swinging back to employers,” Sues commented on the report. “Early in 2023, we see this trend evidenced by base-salary increases being slightly higher at the median than in years past, but not to the level that these increases would match current levels of inflation. This shows that employers aren’t feeling the pressure to shield employees from all that the macroeconomic environment might be throwing at them.” He added that employees have been gradually leaning towards stability rather than speculative opportunities amid mounting fears of a recession.
“This confluence of factors is most likely to lead back to a traditional pay-for-performance compensation model, as those employees that perform well are likely to be rewarded,” Sues added. “We expect annual incentives and long-term compensation for 2023 to shift from the record bonuses seen in recent years and return to normal levels that once again favor employers.”